Why did solar get so cheap in the last 20 years?

The price of solar energy has dropped dramatically over the past two decades. Since 2010 alone, the cost of installed solar has dropped 70 percent. But how? And what does the future of solar look like?

Thanks to Kyle Pennell fromPowerScout (a marketplace that lets you compare multiple quotes for all your smart home improvement projects like home solar) for contributing this article to Unplugged.

The price of solar energy has dropped dramatically over the past two decades. Between 1998 and 2009, the cost of installed solar dropped by 30 percent. And since 2010, the cost of installed solar has dropped a further 70 percent.

Today, building a new utility-scale solar plant is far less expensive than building a new fossil fuel-burning power plant of equal capacity. This drop in solar costs is due to a variety of factors, including:

Better technology and panel design

New manufacturing techniques have been a major driver behind the decline in solar prices. The past 20 years have seen the development of more compact and efficient panel designs that require fewer resources overall. These innovations enable manufacturers to save money and pass those savings on in the form of lower prices.

Lower manufacturing costs

Declines in manufacturing costs have also led to cheaper, more affordable panels. China, in particular, has made massive investments into all sectors of the solar industry over the past 20 years.

Chinese solar panel makers benefit not only from generous government subsidies, but also from low labor costs: the average wage in China is about $3.60 per hour, while the average wage in the U.S. hovers around $21 per hour.

This confluence of low labor costs and government investment has led to China’s rapid growth as an industry leader. Analysts credit the 80 percent decline in global panel prices that occurred between 2008 and 2013 to the rapid growth of the Chinese solar industry. Today, six of the top 10 solar manufacturers are Chinese, and two-thirds of all solar panels are now made in China.

But these low panel costs have also frustrated domestic solar manufacturers. Some have argued that cheap foreign panels, especially those from China, have made it impossible for American manufacturers to compete. SunEdison, for instance, filed for bankruptcy in 2016, and Suniva filed for bankruptcy in 2017. Shortly thereafter, Suniva and another panel maker, SolarWorld, filed a petition with the U.S. International Trade Commission arguing for tariffs on imported solar panels and annual limits on the number of imported panels. The president will decide how to pursue the case later this year.

Lower soft costs

Soft costs － the costs that are not directly associated with the purchase of solar panels, inverters, and other equipment － have also declined dramatically over the past 20 years.

Some of these declines are due to increases in corporate efficiency. The internet, for instance, has made marketing and customer acquisition much easier than it was back in 1998 (though the industry still relies heavily on door-to-door salespeople to increase sales of residential solar).

Other reductions come from the installation process itself. Modern panels are lighter and more compact than they were 20 years ago, mounting systems are easier to use, and installers now have far more experience. This has contributed to a steep drop in installation times. A standard panel installation today takes about four hours; a decade ago, the same installation would have required closer to 16 hours.

Panel prices have remained relatively flat since 2012, and analysts believe that in the U.S., most of the future reductions in the price of rooftop solar installations will come from declines in soft costs, which constituted 67 percent of the costs associated with installing a residential solar system last year.

Government investment and financial incentives

In 2011, the Solar Energy Technologies Office (SETO) at the U.S. Department of Energy launched the SunShot Initiative, an effort aimed at making solar energy competitive with traditional electricity sources, without subsidies, by 2020. To that end, SETO worked to streamline permitting processes, collaborated with partners in industry and research labs, and poured millions into improving solar cell technology and manufacturing systems.

SETO announced last year that it had reached the target for utilty-scale installations － $0.06 per kilowatt hour － three years ahead of schedule. The SunShot Initiative will continue working to bring costs down even further while improving grid reliability and resilience.

Similar programs exist in most of the developed world (and some of the developing world, too). Despite some recent backwards motion, the U.S. and the global community have generally been interested in promoting the growth of solar and other renewables as a means to combat climate change.

Federal, state, and local financial incentives have also helped make solar more affordable. The most generous incentive is the federal government’s renewable energy investment tax credit (ITC). Introduced in 2005 and extended in 2015, the ITC allows homeowners to claim a tax credit equal to 30 percent of their solar energy system. In other words, a $20,000 system would qualify you for a $6,000 tax credit.

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Economies of scale and better financing options

The more solar panels there are, the better manufacturers become at making them, and the cheaper they become to ship. Analysts have even developed an explanatory model, Swanson’s law, to explain the phenomenon. According to Swanson’s law, whenever the production and shipment of solar panels doubles, panel prices drop by 20 percent. The effect is cyclical: as costs decline, the number of people for whom solar is a viable, affordable possibility increases, which further depresses panel prices. (We might now be in a post-Swanson era. As mentioned above, panel prices have leveled out since 2012 even as panel installations increase; price reductions since then have been primarily due to declining soft costs.)

But while solar has become far cheaper than it used to be, a residential solar system remains a substantial investment. Most people can’t afford to pay $15,000 to $25,000 out-of-pocket for solar energy.

Instead, most solar customers lease their systems or take out a loan in order to cover for the cost. Greater access to financing options has helped increase the number of installed solar panels, which in turn has led to lower costs.

Most people take out home equity loans to finance their panels. Others might choose to take a loan directly from the solar installer, which often partner with financial institutions to streamline the purchasing process. Property assessed clean energy (PACE) loans － currently available in 31 states and the District of Columbia － allow homeowners to take out a loan against their house, then repay it as an added line item on their taxes. And if all else fails, homeowners might choose to take out a personal loan to cover their investment.

The future of falling prices

According to PowerScout, a Californian solar startup, the price of solar will continue to fall 4.4 percent each year through 2022. But if you’re interested in going solar, don’t wait; the renewable energy investment tax credit － currently at 30 percent － is set to decline to 26 percent in 2020, then 22 percent in 2021. After that, unless Congress approves an extension, the tax credit will be eliminated entirely for residential solar installations in 2022.